As a military man, Dwight Eisenhower could appreciate the value of a dependable road. While serving as Allied commander in Europe during World War II, Gen. Eisenhower often struggled to move men and military machines along narrow, muddy roads. But when Allied troops crossed into Germany in early 1945, Eisenhower greatly admired the wide, well-built autobahns that Allied troops and supply trucks successfully used in their final push to Berlin. So after Eisenhower swept to victory in the U.S. presidential election in 1952, he spent considerable time and political capital on a push to build a similar modern highway network here in America.
The President believed a federally supported highway system would boost the post-war U.S. economy, creating jobs and promoting more travel, tourism and interstate commerce. And in those early years of the Cold War, Eisenhower argued that a network of reliable superhighways would strengthen civil defense by creating efficient evacuation routes away from major cities and other high-value targets.
After two years of study, Eisenhower unveiled his ten-year, $101 billion solution on Feb. 22, 1955. “Our unity as a nation," Eisenhower said, depended on "individual and commercial movement over a vast system of interconnected highways crisscrossing the country and joining at our national borders with friendly neighbors to the north and south."
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[SOURCE: Enrolled Acts and Resolutions of Congress, 1789-1996; General Records of the United States Government; Record Group 11; National Archives]
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Eisenhower proposed creating an independent federal agency to build and maintain this interstate highway system. The new agency, separate from the federal budget, would issue bonds repaid over time through federal gas tax revenues.
The new chairman of the Senate’s powerful Finance Committee, U.S. Sen. Harry F. Byrd, Sr. of Virginia, liked roads, too. As a business owner, former state legislator and onetime Virginia governor, Byrd had consistently advocated for reasonable transportation improvements. But Byrd, the dominant figure in conservative 20th century Virginia politics, was known for being a “pay-as-you-go” man. He absolutely abhorred government debt.
In the Feb. 24, 1955, Richmond Times-Dispatch, Sen. Byrd blasted Eisenhower’s interstate highway plan. He argued its funding mechanism would result in confusion and the “end of honest bookkeeping.” He complained that substantial interest payments due over the lifetime of the bonds would not be counted as part of the overall federal debt. It was “just pure pork barrel” politics, Byrd told the Times-Dispatch.
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The Richmond Times-Dispatch published this editorial cartoon on Feb. 24, 1955, two days after President Dwight Eisenhower unveiled his ten-year, $101 billion interstate highway proposal. The cartoonist, Fred Seibel, would draw more than 16,000 editorial cartoons over his 30-year career at the Richmond newspaper. [SOURCE: Richmond Times-Dispatch, Feb. 24, 1955, p14]
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On the same day, the newspaper’s conservative editorial page criticized Eisenhower's proposal as “a mammoth federal program” with “unsound fiscal features.” Sen. Byrd would lead several unsuccessful efforts to kill Ike's road proposal, but theinterstate highway plan would be adopted by Congress the following year. Today, the Eisenhower Interstate Program encompasses 47,000 miles of road.
The Feb. 24, 1955, Times-Dispatch carried another front-page article of interest to us here: “U.S. Charges H.L. Donovan in Tax Case” was the headline, and the article was located center-right, just below the fold. The story said Harry Donovan, age 46, had "voluntarily surrendered" to federal marshals the previous day “after being told by telephone” that he was wanted on charges of federal income tax evasion. Donovan, who was described in the lead sentence as a “racehorse owner,” waived a preliminary hearing and was released on $3,000 bond.
As the Donovan story jumped to an inside page, readers were informed it was highly unusual for federal prosecutors to file direct charges rather than relying on grand jury indictments in income tax cases like Donovan’s. Prosecutors explained that the next meeting of the federal grand jury in Richmond was not scheduled until April, so they had rushed to file these charges before the clock ran out on the statute of limitations covering Donovan’s alleged crimes. The story also noted that Donovan had tangled with the IRS once before, reaching a favorable settlement in U.S. Tax Court in 1938 over taxes he owed on undeclared income from what he readily acknowledged was an extensive Richmond gambling operation.
The grand jury indictment which eventually followed Donovan's initial 1955 arrest fleshed-out the government’s case in greater detail. The indictment alleged Donovan underreported his income and underpaid his tax obligations in 1948, 1949, 1950 and 1951. The IRS relied on the relatively new and still controversial “net worth method” as the basis of their accusations. They compared the income and deductions claimed on his annual tax returns with his purchase of increasingly impressive homes, the ostentatious Thorncliff estate in Goochland and his stable of expensive racehorses. Based on his lifestyle and spending patterns, the IRS figured he grossly understated his gambling income and owed Uncle Sam a combined $107,000 in unpaid taxes -- the equivalent of $1 million today.
The prosecutor’s trial memo revealed just how closely the IRS had been watching Donovan. In 1948, agents interviewed him, searched a safe deposit box at his bank, and watched as he voluntarily opened safes located in his home and at Thorncliff. He was interviewed by IRS agents again in the summer of 1952, and twice more in 1953.
Donovan’s lawyers argued that any allegedly excessive spending between 1948-51 came from the hundreds of thousands of dollars Donovan had hoarded during 20 years of bootlegging and illegal gambling -- income that now was out of reach from the tax man. Proving the existence of Donovan’s alleged bankroll was the linchpin of his defense because cash carried over from year to year is not taxable.
The criminal jury trial in Richmond federal court in May 1956 was originally scheduled for four days but it ultimately stretched to eight. Reporters from both of Richmond's daily newspapers covered it extensively, and their stories were picked-up and redistributed to newspapers across the state by the Associated Press. The trial transcript fills more than 900 pages, and witness testimony provided a fascinating glimpse at the scale of Donovan’s illegal numbers operation:
Donovan employed 40 “pickup men” who coordinated the daily activities of up to 800 street-level numbers writers. In 1948, Donovan’s operation took in at least $2 million in illegal wagers, which would represent a $20+ million a year criminal enterprise today. His lawyers did not dispute the $2 million estimate, but claimed Donovan’s cut after paying winners, commissions and other expenses was only $120,000 -- the equivalent of about $1.3 million today.
Following his 1938 tangle with the IRS in U.S. Tax Court, Donovan hired a certified public accountant in Richmond to maintain his books and prepare his annual taxes. “I want you to keep my books properly … and I want to pay what I owe to Uncle Sam,” Donovan allegedly told CPA A.M. Toler. The CPA used the adding machine tapes generated during each day’s settlement in the numbers game to keep a log of total wagers, prize payouts and other expenses, including the 10% commissions Donovan paid to the hundreds of people writing the individual bets for him. Donovan’s longtime office manager, Charles Jenkins, said “We all knew we were in the numbers business, but we conducted ourselves as gentlemen and we handled the business in a businesslike manner.”
Donovan’s lawyers readily admitted their client had lived “all of his life, since his early teens, engaged in business outside of the law -- but he is not being tried for that.” Defense lawyers told the jury that bootlegging and gambling, while illegal, were businesses nonetheless. “You are not dealing with the ordinary businessman,” defense attorney Alexander Neal Jr. said in his opening statement. “This man is in a business, yes, but what is his inventory? It is cash. Because of the nature and the type of this business, he has got to deal in cash.” Neal continued: “He has been unable to maintain any bank account for fear of confiscation. He has had to do a cash business. And we expect to show that the money that Harry Donovan spent – and this is the crux of the case, gentlemen – that approximately $195,000 that Harry Donovan spent between 1948 and 1951 came out of his bankroll. It was cash. It came out of his pocket, or out of his safe, or wherever he had it hidden. Every bit of it is reflected in his records.”
Donovan’s wife, Louise, testified during the trial, but Harry did not. “Did you know at the time you married Mr. Donovan that he was in the whiskey business and the gambling business?” the prosecutor asked her. “Yes, I did, but I loved him very much, and I married him and I have had 28 very happy years with him,” Louise replied [see Oct. 15, 2019 post]. Louise testified that, after a 1936 police raid, she helped Harry package approximately $150,000 into bricks of cash which the Donovans hid in secret compartments constructed inside their homes. She also testified they asked a half-dozen friends and family members to hold some of that cash for them “until the heat was off.”
As prosecutors explored the mechanics of Donovan’s numbers racket for the jury, they raised eyebrows by eliciting testimony which suggested Donovan might have been paying-off Richmond police officers for protection for years. While Donovan was under IRS surveillance in 1936, IRS agent E.M. Hawley testified during the 1956 trial, police cars frequently were spotted at Donovan’s former Grayland Ave. home. “He would come out for a few moments and talk to them and then would go back inside,” Hawley said. Donovan’s lawyers objected to the implication that he was paying-off the cops, but the prosecutor doubled-down: “Your Honor, I submit that frequent contacts with members of the Police Department can lead to only one conclusion, and that is that money was being paid to various policemen.”
Donovan’s legal team argued the Thorncliff horse farm in Goochland County had become a money pit for the Donovans, gradually siphoning away much of his illicit cash hoard and forcing Donovan to sell several rental properties he owned across the city. On his tax returns, Donovan apparently claimed financial losses at Thorncliff to offset, in part, what would have been taxable income from the numbers operation.
Several defense witnesses testified that Harry Donovan quit the numbers business completely in 1951; that's when Congress, acting in response to the Kefauver Commission report, began requiring gamblers to disclose certain details of their business operations and purchase a $50 wagering tax stamp. By 1951, Donovan was fully engaged in the horse business, and that's also the year he started a jukebox and vending machine business.
After prosecutors finished presenting their case, the defense asked U.S. District Judge Sterling Hutcheson for a directed verdict from the bench. Defense lawyers argued Donovan’s lifestyle was clearly funded by this alleged hoard of cash accumulated over two decades. What’s more, they said, the IRS had not produced any records to prove Donovan failed to fully disclose the true extent of his gambling income between 1948-51. The judge deferred a decision.
U.S. District Judge Sterling Hutcheson presided over
Harry Donovan's eight-day jury trial for income tax
evasion in the spring of 1956.
[SOURCE: Getty Images/Time-LIFE Collection]
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“Before the case went to the jury, both the defense and government attorneys engaged in a last-minute verbal slugging match to drive home their arguments,” the Richmond Times-Dispatch reported in its coverage of the trial's closing arguments. Reporters noted Donovan had “listened intently from a chair directly behind his battery of lawyers as the long line of witnesses was paraded before the jury."
In his closing argument, federal prosecutor James Moore summed-up the government's case. "I think that there is far more unreported income here than the government has been able to find. The whole operation lends itself to the type of things tax evaders do," Moore argued.
“‘This man has been under continual, I should not say prosecution, but persecution, for 26 years,’ replied Alexander W. Neal, one of Donovan’s three attorneys. ‘The United States government is trying to destroy this man. They have been trying to do it for 20 years.’ … Neal charged that the net worth method used by the IRS was a method used when the government ‘can’t find anything wrong with the man’s books, and that’s what was done here.’”
In instructing the jury, Judge Hutcheson carefully cautioned the panel that Donovan was not on trial “for any whiskey operation or the operation of the numbers business.” The judge also instructed the jury not to make any inference of guilt from Donovan’s decision not to testify in his own defense.
After deliberating for six hours late into the night, the jury of 11 men and one woman returned four guilty verdicts against Donovan: guilty for underreporting his income between 1947-51, and guilty of understating his tax obligations by about $107,000. The convictions meant he was facing up to 20 years in prison. Sentencing was deferred until a later date.
But in a stunning move just three weeks later, Judge Hutcheson set-aside the jury verdicts. The judge ruled on June 6, 1956, that the government had failed to produce sufficient evidence of an undisclosed source of income and merely “inferred” that Donovan’s records inaccurately stated his actual income.
That afternoon's Richmond News Leader carried a rare, above-the-masthead headline: “Judge Sets Aside Donovan Tax Case Verdict.” In his ruling, which Judge Hutcheson read from the bench before a half-filled courtroom, the judge noted that the IRS use of the net worth method had “given the courts concern.” He quoted from a 1954 U.S. Supreme Court case, Holland v. U.S.: “Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute.”
“There was no proof advanced by the prosecution in support of its contention that the books and records did not properly reflect the income received from the business of the taxpayer,” Judge Hutcheson said. Further, he said, the government attempted “to invoke a presumption of falseness because of the occupation of the taxpayer.”
“To sustain the verdict in this case would establish a principle to the effect that a showing by the Government of an increase in the known value of the net worth of the assets of a taxpayer, alone, is sufficient to place upon him the burden of proving that none of it represents underreported, currently taxable income. This the courts have declined to do. The case should not have been submitted to the jury for its consideration. Accordingly, the motion of the defendant for a judgment of acquittal is granted.”
Once again, Harry Donovan had managed to outmaneuver the government. The feds would be much better prepared the next time they came for him.
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